[If tx limit is removed] Disturbingly low future difficulty equilibrium

[asdf]

50% of the fee goes to the miner that solves the block. 50% goes to the miner that solves the next block. This way, txfees approach the cost including a transaction x2.

The miner covers his tx inclusion costs by including transactions with fees that are at least double the cost of inclusion and the profits from the half the fees collected in the previous block.

problem solved?

What would it change, really?

Mining will be profitable, absent block rewards.

The 50% from the previous block acts as a kind of replacement for the block reward.

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[FreeMoney]

50% of the fee goes to the miner that solves the block. 50% goes to the miner that solves the next block. This way, txfees approach the cost including a transaction x2.

The miner covers his tx inclusion costs by including transactions with fees that are at least double the cost of inclusion and the profits from the half the fees collected in the previous block.

problem solved?

What would it change, really?

Mining will be profitable, absent block rewards.

The 50% from the previous block acts as a kind of replacement for the block reward.

I think the passing forward will eventually happen. Imagine the future with no fixed block reward. A block with a bunch of fees is found and hardly any fee tx remain. There is not much reason to build on that block even though the block finder and the recipients of transactions in those bocks would like you to, I think a fee will be paid. When I thought about this before I thought the equilibrium would be 50% under the assumptions I was using.

[MoonShadow]

50% of the fee goes to the miner that solves the block. 50% goes to the miner that solves the next block. This way, txfees approach the cost including a transaction x2.

The miner covers his tx inclusion costs by including transactions with fees that are at least double the cost of inclusion and the profits from the half the fees collected in the previous block.

problem solved?

What would it change, really?

Mining will be profitable, absent block rewards.

The 50% from the previous block acts as a kind of replacement for the block reward.

I think the passing forward will eventually happen. Imagine the future with no fixed block reward. A block with a bunch of fees is found and hardly any fee tx remain. There is not much reason to build on that block even though the block finder and the recipients of transactions in those bocks would like you to, I think a fee will be paid. When I thought about this before I thought the equilibrium would be 50% under the assumptions I was using.

I don't understand this at all.  Fee sharing doesn't change the dynamics, nor increase the likely total fees, of transactions.  It's just wealth transfer serving no obvious purpose.

[FreeMoney]

50% of the fee goes to the miner that solves the block. 50% goes to the miner that solves the next block. This way, txfees approach the cost including a transaction x2.

The miner covers his tx inclusion costs by including transactions with fees that are at least double the cost of inclusion and the profits from the half the fees collected in the previous block.

problem solved?

What would it change, really?

Mining will be profitable, absent block rewards.

The 50% from the previous block acts as a kind of replacement for the block reward.

I think the passing forward will eventually happen. Imagine the future with no fixed block reward. A block with a bunch of fees is found and hardly any fee tx remain. There is not much reason to build on that block even though the block finder and the recipients of transactions in those bocks would like you to, I think a fee will be paid. When I thought about this before I thought the equilibrium would be 50% under the assumptions I was using.

I don't understand this at all.  Fee sharing doesn't change the dynamics, nor increase the likely total fees, of transactions.  It's just wealth transfer serving no obvious purpose.

It doesn't make sense as long as people still follow the rule of "build off of whichever version of a block you see first", but if some people stop doing that then some possibilities open up.

Imaging the slow version was offering the finder of the bock who built on top of it 1BTC. Why not switch over once you get the slow block? This could move the slow blocks chance of staying from 5% to 50% if half of miners were looking for this and it would be well worth it to pay that 1BTC.

Once something like this is in place you have the option of working on the current block which has very few fees in it or redoing the previous block to get all those fees and paying people to work on yours instead. If the offering you'll need to pay (just enough to outbid the other finder) is less than the extra fees then this is what you do.

I don't think people will keep working on old blocks and waste a ton of work, I think an equilibrium fee of about half the average fees in a block will emerge. At half there is no incentive to work on an old block because you'll have to pay more than half to outbid the other guy who is making the standard offering.

I think this is cool because your tx fee would now indirectly go to pay for more and more work getting piled on instead of just the one block of work as it is now.

[asdf]

50% of the fee goes to the miner that solves the block. 50% goes to the miner that solves the next block. This way, txfees approach the cost including a transaction x2.

The miner covers his tx inclusion costs by including transactions with fees that are at least double the cost of inclusion and the profits from the half the fees collected in the previous block.

problem solved?

What would it change, really?

Mining will be profitable, absent block rewards.

The 50% from the previous block acts as a kind of replacement for the block reward.

I think the passing forward will eventually happen. Imagine the future with no fixed block reward. A block with a bunch of fees is found and hardly any fee tx remain. There is not much reason to build on that block even though the block finder and the recipients of transactions in those bocks would like you to, I think a fee will be paid. When I thought about this before I thought the equilibrium would be 50% under the assumptions I was using.

I don't understand this at all.  Fee sharing doesn't change the dynamics, nor increase the likely total fees, of transactions.  It's just wealth transfer serving no obvious purpose.

it does change the dynamics.

If we agree that transaction fees will approach the cost of including a transaction (you're in the Vandroiy's "The side seeing a problem" category), then fees will only cover the cost of including transactions. Miners have other costs, this is the problem.

Under my proposed scenario, fees will approach double the cost of including a transaction. This leaves some meat for the miners.

As other have pointed out, it also creates an incentive to re-process a block with low fees that proceeds a block with high fees rather than building on that block. I didn't consider this; it is an unintended consequence, which I consider undesirable. To mitigate this bad incentive you could make the algorithm more complicated. For example: 10% of the last five block fees + 50% of the fees from the current block.

The core idea is that there is some reward that doesn't depend on just the transactions that the miner accepts.

[walidzohair]

Consider for now, we're in the future, and miners only gain from transaction fees. I assume now that including a transaction is cheap, and generating a block is, in comparison, expensive. (Is that true?)

Today, it costs the entire network something like $0.001 to process each transaction.

The limiting factor is checking to see if the transaction is valid or not (the CPU cost of ECDSA signature verification).  When the transaction volume gets high enough miners will have to start prioritizing which transactions they check, and they will use transaction fees as a quick initial check to see if they should invest CPU cycles to include transactions in a block.  Yes, miners want to include as many transactions with fees as possible in their blocks, but it won't be economical for any miner or mining pool operator to include an infinite number of them.

And speaking of mining pools... they are a lot more efficient than individual miners because they allow transactions to be verified once instead of requiring that all of the miners in the pool do that work.  Very small miners will be driven to join a mining pool, and the big mining pools will be competing to have the lowest fees and highest payouts (and so will be optimizing their ECDSA verification code and will figure out which transactions are profitable and which aren't).

So:  I don't think bitcoin will have very few miners.  I think it will have lots of miners connected to a smaller number of mining pools, and the whole system will optimize itself to be wonderfully efficient.

I just asked the same question several days ago here

http://forum.bitcoin.org/index.php?topic=24854.0

the question is .. will it survive ?

As for mining economy:

* Huge mining bounty.
* Huge mining community.
* Huge overall network security.
* Tiny neglect-able transaction fees.

BUT, for transaction economy:
* Will the transaction fees stay low enough to continue using this commodity as a sub-dollar Hawala medium ?

If yes then huge miners will cash-out leaving the system vulnerable to attacks can be made by them or any hacker network that can offer to utilize couple mining pools that we have right now.

If NO then the system will be less-business attractive with: no advantage in lower transaction fees, questionable anonymity, less security backed up by smaller mining community, delayed transactions, volatile sub-hour pricing .. etc.


* Will the mining community continue to be this large providing this amazing network safety ?


I am a BTC man ... and these questions to know more or to pin point near less-than-a-year issues.

[markm]

If more than one blockchain-based currency exists, and they are compatible to the extent that using one or another of them is trivially simple, maybe something like having a default high security high transaction cost one and a default low security low transaction cost one potentially for each locale in the locales system there should be less worry about free riders in the high security high transaction fee blockchain(s) because they will have other chains to ride that offer them a greater chance of obtaining a free ride.

Exchanging back and forth between chains should be pretty simple, hopefully far simpler than trying to exchange back and forth with fiat currencies.

-MarkM-

[cunicula]

Economics professor who sees a serious problem here.  I have a background in industrial organization which is the relevant subfield.

Recommendation: Hire an academic economist specializing in Industrial organization to model the problem and propose possible solutions.

No one will trust me so hire someone at random.

Mike Hearn, if you can chat with Hal Varian at google, do so. He has the appropriate expertise. I think they pay him a mint though so it may be hard to get some of his time.

Final comment: This is a complez system. Analysis requires a formal mathematical model. Don't trust hand-waving and argument by analogy.

[Meni Rosenfeld]

Economics professor who sees a serious problem here.  I have a background in industrial organization which is the relevant subfield.

Recommendation: Hire an academic economist specializing in Industrial organization to model the problem and propose possible solutions.

No one will trust me so hire someone at random.

Mike Hearn, if you can chat with Hal Varian at google, do so. He has the appropriate expertise. I think they pay him a mint though so it may be hard to get some of his time.

Final comment: This is a complez system. Analysis requires a formal mathematical model. Don't trust hand-waving and argument by analogy.

I doubt this is a problem anyone can single-handedly solve, even if he has credentials. And while I'm not much familiar with the field of industrial organization, I'm sure it provides only one piece of the puzzle and that many other fields have to be involved.

A discussion among several people with relevant skills, in a venue with higher signal-to-noise ratio than this forum, seems more appropriate.

And I'll take this opportunity to say that I think the inclusion of proof-of-stake to augment proof-of-work will be key to the resolution, by allowing a high level of security without much mining.

[ctoon6]

I like an idea where EVERYONE mines to ensure EVERYONE has secure transactions. the fees should be low, only high enough to stop large amounts of spam and to cover the costs of electricity and in the long term ~3-6 months, pay off a rig.

[cunicula]

I like an idea where EVERYONE mines to ensure EVERYONE has secure transactions. the fees should be low, only high enough to stop large amounts of spam and to cover the costs of electricity and in the long term ~3-6 months, pay off a rig.

A lot depends on what iratio of rewards for mining to bitcoin market cap is defined as secure. The current level could never be supported using txn fees.

Currently, around 200k btc are issued per month to reward miners for security. The pool of rewards from a fee is the transaction tax rate * the transaction velocity. Roughly double the monthly btc/USD trade volume is a reasonable estimate of velocity. This is about 2 million btc per month.

To maintain the current level of security using a txn fee, you would need to tax every send at a rate of 10% (actually more since the tax would decrease velocity). This would yield the requisite 200,000 btc to pay miners.

This is clearly not sustainable. I think a more realistic tax is 0.1-1%. Any higher and the technology becomes useless. The implied level of security is 10 to 100 times lower than at present. Would this be secure?

It depends on how much an attacker could profit from controlling say 75% of hashing power. I don't know the answer to this. It seems safe to assume that potential profits are proportional to txn volume and/or money supply. We need estimates of the proportions (e.g. 10% of money supply?  1% of money supply 0.1% of money supply? (if it is the last value then a 0.1-1% tax on all sends could be sufficient to secure the network.). If it is much more than this, the future of decentralization looks bleak.

[ctoon6]

I like an idea where EVERYONE mines to ensure EVERYONE has secure transactions. the fees should be low, only high enough to stop large amounts of spam and to cover the costs of electricity and in the long term ~3-6 months, pay off a rig.

A lot depends on what iratio of rewards for mining to bitcoin market cap is defined as secure. The current level could never be supported using txn fees.

Currently, around 200k btc are issued per month to reward miners for security. The pool of rewards from a fee is the transaction tax rate * the transaction velocity. Roughly double the monthly btc trade volume is a reasonable estimate of velocity. This is about 2 million btc per month.

To maintain the current level of security using a txn fee, you would need to tax every send at a rate of 10% (actually more since the tax would decrease velocity). This would yield the requisite 200,000 btc to pay miners.

This is clearly not sustainable. I think a more realistic tax is 0.1-1%. Any higher and the technology becomes useless. The implied level of security is 10 to 100 times lower than at present. Would this be secure?

It depends on how much an attacker could profit from controlling say 75% of hashing power. I don't know the answer to this. It seems safe to assume that potential profits are proportional to txn volume and/or money supply. We need estimates of the proportions (e.g. 10% of money supply?  1% of money supply 0.1% of money supply? (if it is the last value then a 0.1-1% tax on all sends could be sufficient to secure the network.). If it is much more than this, the future of decentralization looks bleak.

Im not talking about just dedicated miners, im saying if everyone donates a few hours a day of cpu/gpu mining, of course this will only matter if bitcoin goes mainstream and replaces usd or can at least be used at a gas station or something. if that happens, then just the additional 20% of the na/euro population mining would be more than enough to secure the network and raise difficulty by a lot. it would only cost each person a few dollars a month at most. this is of course implying a lot. we don't really know how much the usd to BC conversion will be even 6 months from now, if it skyrockets, then we can drastically reduce fees and miners will still get the same amount money kind of.

[cunicula]

@Vandroiy suggests that proof-of-stake may be part of the solution and I think he is probably right.

The current arrangement is vulnerable to short-selling/sabotage. An attacker could borrow a bunch of bitcoins, convert them to USD, execute an attack which causes the network to fail, purchase very cheap bitcoins to return to the lender.

What if proof-of-work and proof-of-stake were combined. For example, miners sends X bitcoins to an escrow blockchain account for one year. The escrowed monies cannot be traded to a new address.

The computer holding the address is allowed to contribute hashing power sufficient to mine a maximum of 0.1*X bitcoins (as new coins or fees) within the next six months. After he mines up to this limit, any additional hashing contribution from the computer is invalid. If he wants to continue mining, he will have to put more money in escrow. There would still be competition among miners who have paid escrow fees to issue the coins before their contracts run up (thus difficulty would not fall to zero). The price of contracts would be denominated in bitcoin so exchange rate movements shouldn't be a big problem.

Under a system like this short-selling/sabotage attacks would be much much more difficult to profit from (not impossible though).

The other type of attack, I think, is excess issuance (i.e. the attacker generates more money than his hashing power is entitled too). This type of attack is still viable, but it does not seem threatening under an escrow system. If the cap on escrowed money can be enforced, at most the attacker could generate 1 excess bitcoin for every 10 escrowed bitcoins per year. Failure to abide by this limit would show up directly in the blockchain unless past transactions could be rewritten by the attacker.

I have no knowledge of coding. Thus please be patient if I have misunderstood possible attack strategies or if the proposal is technologically impossible. Of course, I know that it is thinking outside of Satoshi's Bitcoin Box and don't care.

[error]

Work is already in progress on allowing bitcoins to be encumbered until a certain time has passed; search the forum for nLockTime for details.

[cunicula]

Work is already in progress on allowing bitcoins to be encumbered until a certain time has passed; search the forum for nLockTime for details.

I'm aware of the idea of encumbering coins.

Some additional technology is required to link encumbered coins to hashing, no?

More serious is the political problem of getting people to accept the change.

Adding proof-of-stake to proof-of-work would have a major negative impact on people currently invested in mining,
while benefiting those currently holding coins; Essentially some mining rights are transferred to coin holders and miners would need to buy them back or sell their equipment.

Who wins when miners and coin holders disagree?

[Meni Rosenfeld]

@Vandroiy suggests that proof-of-stake may be part of the solution and I think he is probably right.

He did? I suggested it in this thread, and this is an idea I got from QuantumMechanic.

What I had in mind is this - once in a while (say, every day) holders of bitcoins will use their private key (or a related private key) to digitally sign a recent block. A block with signatures of holders of >50% of the bitcoins at the time will trump a competing block with a longer chain but no signatures. If someone tries to sign two incompatible blocks, the earlier signature will count. This way, once a block gets >50% signatures is guaranteed to be set it stone, no matter how long a chain an attacker tries to build. Holders will be incentivized to do this because they want to protect the network security and hence the value of their holdings, and it may also be possible to include a "signature fee" in the transactions.

So, if someone sends a large transaction (large enough to be worth double-spending), he only needs to wait a day for it to be confirmed. This means mining will only be needed in a quantity sufficient to thwart casual attacks of low amounts, thus not a whole lot of it will be needed. That amount can be sustained with low transaction fees.

This is similar to the current checkpoint system, except it's clearer who decides the checkpoints and harder to fake, so can be done more frequently and automatically.

Adding proof-of-stake to proof-of-work would have a major negative impact on people currently invested in mining,
while benefiting those currently holding coins; Essentially some mining rights are transferred to coin holders and miners would need to buy them back or sell their equipment.

The change should have a very small short-term effect on the miners, especially if implemented while new coin generation is significant.

[cunicula]

@Vandroiy suggests that proof-of-stake may be part of the solution and I think he is probably right.

He did? I suggested it in this thread, and this is an idea I got from QuantumMechanic.

What I had in mind is this - once in a while (say, every day) holders of bitcoins will use their private key (or a related private key) to digitally sign a recent block. A block with signatures of holders of >50% of the bitcoins at the time will trump a competing block with a longer chain but no signatures. If someone tries to sign two incompatible blocks, the earlier signature will count. This way, once a block gets >50% signatures is guaranteed to be set it stone, no matter how long a chain an attacker tries to build. Holders will be incentivized to do this because they want to protect the network security and hence the value of their holdings, and it may also be possible to include a "signature fee" in the transactions.

So, if someone sends a large transaction (large enough to be worth double-spending), he only needs to wait a day for it to be confirmed. This means mining will only be needed in a quantity sufficient to thwart casual attacks of low amounts, thus not a whole lot of it will be needed. That amount can be sustained with low transaction fees.

Sorry. Plenty of people have talked about proof of stake, in this thread and elsewhere. I didn't want to take credit for that part of the idea. I should have assigned it more carefully, however. Again, sorry.

I don't think your version will work. Because of free-riding, incentives for holders of bitcoin to monitor transactions are extremely weak. For example, large transactions are difficult to distinguish from large numbers of small transactions. The mechanism through which stake holders identify cheaters is unclear. Would identification be accurate? costly?

Much better to ensure that everyone participating in mining maintains a stake proportional to his mining activity. That way anyone with a large enough share of hashing power to mount an attack will have to simultaneously store a huge amount of escrowed wealth in bitcoin. Attacks will no longer be incentive compatible.

[jtimon]

It depends on how much an attacker could profit from controlling say 75% of hashing power. I don't know the answer to this. It seems safe to assume that potential profits are proportional to txn volume and/or money supply. We need estimates of the proportions (e.g. 10% of money supply?  1% of money supply 0.1% of money supply? (if it is the last value then a 0.1-1% tax on all sends could be sufficient to secure the network.). If it is much more than this, the future of decentralization looks bleak.

I want bitcoin to be a success. But if this tragedy of the commons impedes us to have a block chain without creating new money to reward miners, we still can generate forever and have a fixed monetary base. We can have demurrage instead of fees.

[ctoon6]

It depends on how much an attacker could profit from controlling say 75% of hashing power. I don't know the answer to this. It seems safe to assume that potential profits are proportional to txn volume and/or money supply. We need estimates of the proportions (e.g. 10% of money supply?  1% of money supply 0.1% of money supply? (if it is the last value then a 0.1-1% tax on all sends could be sufficient to secure the network.). If it is much more than this, the future of decentralization looks bleak.

I want bitcoin to be a success. But if this tragedy of the commons impedes us to have a block chain without creating new money to reward miners, we still can generate forever and have a fixed monetary base. We can have demurrage instead of fees.

I kind of like that idea, but if too many people decided to save BC, then you would get inflation.

[jtimon]

I want bitcoin to be a success. But if this tragedy of the commons impedes us to have a block chain without creating new money to reward miners, we still can generate forever and have a fixed monetary base. We can have demurrage instead of fees.

I kind of like that idea, but if too many people decided to save BC, then you would get inflation.

Thank you !!
But I don't get it. If too many people hoard (not exactly the same as save) btc you would have (price) deflation, not inflation.
Am I missing something?
Also, demurrage is an incentive against hoarding.